Question

Answer 1

1) Calculation of cost it will be able to avoid by purchasing empty tubes from outside supplier:-

Decrease in Direct Material Cost (30% of $4.20)	$1.26
Decrease in Direct Labor (15% of $2.60)	$0.39
Decrease in Variable manufacturing overhead (15% of $1.00)	$0.15
Total Cost avoided by purchasing from outside supplier	$1.80

Therefore the company will able to avoid $1.80 per box by purchasing from outside supplier.

Working Note:-

Separation of Manufacturing Overhead into Fixed and Variable:-

Total Fixed Overhead absorbed for this product given in the question = $80,500

Total Boxes Produced = 115,000

Fixed overhead absorption rate per box = $80,500/115,000 = $0.70

Variable manufacturing overhead = $1.70 - $0.70 = $1.00 per box

2) Financial advantage (disadvantage) if it buys from outside supplier:-

Saving in manufacturing cost as calculated in part 1	$1.80
Less: Purchase price per box if purchased from outside supplier	$1.90
Financial Disadvantage of buying from outside supplier (1.80-1.90)	($0.10)

Therefore there will be a disadvantage of $0.10 per box if tubes purchased from outside supplier.

3) Calculation of Financial Disadvantage in Total (Amount in $)

Saving in Cost (115,000 boxes*$1.80)	207,000
Loss: Cost of purchase (115,000 boxes*$1.90)	(218,500)
Total Disadvantage	(11,500)

4) As there is a total disadvantage of $11,500 of buying the tubes from outside supplier, the company should not buy the boxes of tube from outside supplier. Thus Silven industries should make the tubes.

5) The maximum saving in cost per box of tube by buying tubes from outside supplier is $1.80, thus the company will pay upto $1.80 per box of tube only. Thus the maximum price that Silven industries would be willing to pay per box of tube is $1.80.

6) Calculation of Saving in cost in case the sales volume is 138,000 (Amount in $)

Saving in Material, labor and overhead cost (138,000*$1.80) (A)	248,400
Saving in extra rent cost (B)	43,000
Total saving in cost (C = A+B)	291,400
Purchase cost from outside supplier (138,000*$1.90) (D)	262,200
Financial Advantage in buying the tubes (C-D)	29,200

As there is a total financial advantage of buying all the tubes from Outside of $29,200 the company should buy all the tubes from outside supplier

7) As there is a disadvantage of $11,500 if 115,000 boxes are purchased from outside supplier, the company should make 115,000 boxes and remaining boxes of 23,000 should be purchased from outside as extra rent cost of $43,000 will be saved by it.

Number of boxes of tubes manufactured by Silven.	115,000
Number of boxes of tubes purchased from the outside supplier	23,000